My first mortgage has a 3.1 percent interest rate. Now I need to pull some cash out of my home's equity. Should I refinance everything into a new mortgage or is there a better option?
Hang on to that rate like it's a family heirloom because right now, it is.
With 30-year fixed mortgage rates hovering in the 6.5 percent to 7 percent range, rolling your low-rate first mortgage into a new loan just to access equity would be an expensive move. You would be trading a rate you can maybe never get back for a higher payment on your entire balance.
The smarter path for most homeowners in your situation is a Home Equity Line of Credit, or HELOC. A HELOC is a separate loan secured by your home's equity that leaves your first mortgage completely untouched. You borrow what you need, when you need it, and only pay interest on the amount you've drawn. Rates are variable but are tied only to the equity portion, not your full mortgage balance.
One caveat worth understanding about HELOCs: the interest rate can move, and sometimes sharply. Most HELOCs are tied to the prime rate, which shifts when the Federal Reserve adjusts its benchmark. If the Fed raises rates, your HELOC payment goes up, occasionally within a single billing cycle. Borrowers who took out HELOCs in 2021 saw their rates roughly double over the following two years. A fixed-rate home equity loan avoids that risk but locks you into today's rates for the full term. Whichever path you choose, it's worth asking your lender to walk through a worst-case rate scenario before you sign.
A Home Equity Loan is another option. It works similarly but delivers a lump sum at a fixed interest rate, which appeals to homeowners who prefer predictable payments and know exactly how much they need.
Both options are widely available and typically carry lower closing costs than a full refinance.
A HELOC or home equity loan lets you access your equity without giving up something you can't replace.